Investors often overlook SEC filings, and it is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots,'(depreciation policies, warranty reserves, and restructuring charges, etc.)that may materially impact Quality of Earnings.

Tuesday, December 26, 2006

Starbucks the Victim of a Coffee Mugging by Oxfam?

Oxfam, a development charity that dates back to World War II, alleges that global coffee retailer Starbucks Corp. (SBUX-$35.38) is depriving Ethiopian coffee farmers of between $88.0 –to- $132.0 million a year, by opposing the Ethiopian government's efforts to trademark three popular varieties of its specialty coffee—Harar, Sidamo and Yirgacheffe beans.

Oxfam and its broad coalition of supporters say: “More than a year ago, Ethiopia approached Starbucks and asked the company to lead the coffee industry by example and sign an agreement recognizing Ethiopia's legal ownership of its fine coffee names. If companies like Starbucks signed such agreements, Ethiopia would occupy a stronger negotiating position with foreign buyers, capture a larger share of the market associated with its coffee names, and better protect its brands.”

Oxfam and its activists allege that there is a huge disparity in the profit distribution to the players in the coffee industry, with Ethiopian coffee farmers often collecting no more than 10 percent of the profits from the sale of their coffees. The rest goes to the coffee industry players that can control the retail price—the international importers, distributors, and roasters like Starbucks.

Starbucks CEO Jim Donald met with Ethiopia to discuss trademark issues on November 29, 2006. Given little progress in their talks, Oxfam and its supporters organized “The Starbucks Day of Action” –in more than a dozen countries—and demonstrated outside many Starbucks stores on December 16, with activists leafleting and carrying the image of an Ethiopian coffee farmer on sandwich board fronts, with the backside reading, "For every cup of Ethiopian coffee Starbucks sells, Ethiopian farmer earn 3 cents. Tell Starbucks: Honor your commitments to coffee farmers." [Ed. note. Watch the video on YouTube now.]

Talks purportedly broke down because Starbucks favored a geographic certification model—much like Jamaican Blue Mountain Coffee, Florida Orange Juice, and French and Napa Valley Wines—which guarantees a point of origin and standard of quality; whereas, Ethiopia refused, opting for brand ownership.

We laud Oxfam’s good intentions, but question their grasp of Ethiopia’s calculus for peculations.

The rhetoric behind economic development today—especially in African countries—is such that where poverty exists, you can be sure that “corruption” won’t be far behind. Aside from widespread allegations of fraud following the May 2005 parliamentary elections, in which results showed the incumbent Ethiopian People's Revolutionary Democratic Front retaining a majority, the business environment—while not thought to be as corrupt as political life—in Ethiopia, still ranked only a 3.70 score (with 1.0 being the best & 5.0 being the worst) on an ”Index of Economic Freedom 2006” census taken by The Heritage Foundation/ Wall Street Journal: “Ethiopia's cumbersome bureaucracy deters investment…. Corruption in Ethiopia poses various problems for [the] business environment, as patronage networks are firmly entrenched and political clout is often used to gain economic prowess."

In our view, irrespective of going the certification process or the intellectual property route, in order for the coffee farmers to share in any incremental value—such as an increase in annual income—necessitates a transparent system that shows how the money is going back to the farmers.

In addition to failing to explain what type of transparent ‘checks and balances’ system need be established, nowhere in its press releases does Oxfam explain how the agency derived the incremental annual benefit to farmers of between $88.0 –to- $132.0 million.

To the contrary, since 2001, Starbucks has been inserting transparency into standard contracts. Today, the Company has economic transparency requirements for 59 percent of all coffee purchased to provide information on the payments made to farmers. This represents 177 million lbs. (80 million kg.) of coffee.

In December 22, 2006, Starbucks Letter to the Editor of the Seattle Post Intelligencer (regarding the Ethiopian Trademark), Dub Hay, VP-Global Coffee Procurement said, too: “While our purchases of Ethiopian coffee represent a very small percentage of the country’s total coffee exports, we pay premium prices – in 2005 our price exceeded the New York commodity market price by 23 percent -- for all of the coffee we buy in 27 countries. And, between 2002 and 2006 we increased purchases of Ethiopian coffee by more than 400 percent and are committed to growing those purchases in the years to come.”

In our view Oxfam and its supporters have not presented a cogent argument to suggest that Starbucks is acting in an unethical or socially irresponsible manner; nor has Oxfam presented any convincing evidence that Starbucks is willfully trying to maximize its own profit margins—by denying Ethiopian farmers their legitimate coffee profits.

Voir dire [Old French: “To speak the truth”] is a tool used to achieve the constitutional right to an impartial jury. Preliminary examination of Oxfam as an impartial juror would show that the aid agency is in an awkward position to comment on the social responsibility of Starbucks:

Language found in a Coffee (Rescue Plan) Policy paper [2002] speaks volumes: “Despite the stagnant consumer market, the coffee companies are laughing all the way to the bank…. Until now, rich consumer countries and the huge companies based in them responded to the crises [slump in coffee prices and economic impact on coffee farmers] with inexcusable complacency. In the face of human misery, there have been many words yet little action.”

In 2004, Oxfam accepted a £100,000 investment by Starbucks into a rural coffee-growing project in Ethiopia and a range of expertise-sharing programs focusing on improving trading agreements for millions of coffee farmers in developing countries.

Given the weaknesses of Oxfam’s arguments and its lapses in credibility, Starbucks comes across less as a coffee-thirsty exploiter of less-developed countries, and more the victim of a coffee mugging.

Editor David J Phillips does not hold financial interests in any of the companies mentioned in this posting. The 10Q Detective has a Full Disclosure policy.

Although your tone is measured and you suggest to use reason to support your point of view, you have failed to provide the reader neither data nor intuitively consumable logic.

The issue here has nothing to do with the corruption of the Ethiopian government or the fact that the government inflicts more pain on the coffee farmer than Starbucks could on its worst day. Nor is it about the credibility of Oxfam and its changing strategy.

This is about a global trading regime that denys poor countries the right to produce affordable AIDS and malaria drugs because of the patent laws of the rich while disregarding the trade mark laws of the poor which aim to internalize the benefits of their brand names.

Starbucks finds itself in a very difficult situation. To advance the longterm interests of its stock holders, Starbucks should lift its objection to Ethiopia's copyright application. Washington too will be well advised to look out for the American consumer. To grant the coffee industry or any industry a veto right to any foreign petition for fair application of U.S. laws would, in the longrun, only hurt the interest of the larger public.

Starbucks continues to demonstrate very poor P.R. and communication skills, and it keeps biting them in the ass. I've been flabbergasted at their lack of media savvy.

FYI, though Starbucks maintains that they PAY a certain price for their coffee, that cannot be compared to Fair Trade (of which I'm no big fan), nor anything resembling "premium prices." Paying $1.30 per pound to a coffee producer cooperative, and paying $1.30 per pound to an import/exporter like Starbucks does (with the associated additional steps in the supply chain), is an apples-to-oranges comparison to be sure.

All that said, Starbucks is definitely being mugged. Like Paris Hilton or Kevin Federline or whoever the tabloid-fodder-du-jour is, Starbucks is the company that a certain demographic loves to hate... and just like with people like Paris, the "haters" feel justified: "Well, THEY'RE the ones putting themselves out there like that. They're EVERYWHERE."

Frankly, I think I'd be able to put together a plan to "save Starbucks' image.." and I'm just a lowly independent coffeebar owner. Why can't they figure it out with their own giant budgets?

Thank you for adding your voice to the growing debate on the Social Responsibilty of Global Companies in Third-World Countries where they do business....One issue that I find troublesome, however, is when NGOs & others with a world stage blame Big Pharma & Fortune 500 Companies for all the social ills in LDC countries--Why should it be assumed that global firms must step in to address the ills in a country like Ethiopia--when the government itself--like many, many African regimes--seem to spend more monies on arms & bullets than they do on fixing the infrastructure & social/health issues endemic to their own country?

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Prior to founding the 10Q Detective, I held equity analyst positions with three brokerage firms and published the investment newsletter e-Growth Profit Letter - dedicated to uncovering companies with innovative, proprietary technologies in a range of industries. My work has been published in The Dick Davis Digest, The Bull & Bear Financial Report, BusinessWeek, CBS Interactive, Forbes, Kiplingers Personal Finance, MSN Money, TheStreet.com, 24/7 Wall Street, The Wall St. Journal, The International Herald Tribune, and Investors Business Daily.
The 10Q Detective is recommended as a 'Must-Read' money blog in Kiplingers (Oct. 2006 & May 2008), Washington Post (May 2009); a 'Best of Financial Blog' by BusinessWeek (Feb. 2007 & April 2008),a 'Smart Stop' by The Journal of Accountancy (March 2008); 'Top 25' by Time magazine, a 'Top 50 Money Blog' by CurrencyTrading.net (April 2008); and, a 2011 LexisNexis Business Law Blog Nominee.